risk taking in academic libraries: the implications of prospect theory
TRANSCRIPT
Tony Horava, AUL (Collections)University of Ottawa
OLA SuperConferenceJan. 28, 2015
Organizational risk
Prospect Theory - Major principles
Implications for risk assessment
Implications for academic libraries
Conclusion
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“Society values risk taking but not gambling,
and what is meant by gambling is risk taking that
turns out badly. From the point of view of managers and a society dedicated to good management, the problem is to develop and maintain managerial reputations for taking "good" (i.e., ultimately successful) risks and avoiding "bad" (i.e., ultimately unsuccessful) risks, in the face of (possibly inherent) uncertainties about which are which.”
James G. March and Zur Shapira, “Managerial Perspectives on Risk and Risk
Taking,” Management Science 33, no. 11 (1987): 1413. http://www.google.com/imgres?imgurl=http://askgeorgie.com/wp-content/uploads/2012/09/11405182-road-ahead-unclear-green-freeway-sign-representing-uncertainty-in-financial-business.jpg&imgrefurl=http://askgeorgie.com/re-wire-your-brain-for-weight-loss-part-iii/&h=1110&w=1200&tbnid=AnU-SeGF8hUurM:&zoom=1&docid=uOuBErgg4U9hlM&ei=37_GVMrXD4uiyQS-sIGoBQ&tbm=isch&ved=0CDgQMygFMAU
The ARL 2030 Scenarios :
A sustained reflection upon the risks and opportunities for academic libraries, based on four possible scenarios.
A call for academic libraries to assess the probability of any scenario occurring and consider the impacts
“Organizations act on what they know or what they believe they know to be certain. Many of those certainties are in actuality uncertainties. Those false certainties become the basis for an organization’s strategic decision-making. “
Frames - lenses that filter some things and allow others to pass through, help us order experience.
Each frame comes with concepts and metaphors for organizing our understanding of the world, esp organizational culture
Four frames – Structural; Human resource; Political; Symbolic
Looking at organizations this way can help us assess what is working and what isn’t – and addressing risk in reframing
Technological - rapid obsolescence and the hype cycle; inadequate or dysfunctional tools; lack of interoperability with other systems; foreshortened life cycles for development; the quality of maintenance and supportFinancial - the institution’s degree of support of the library; the foreign exchange rate; Ontario’s and Canada’s economic performance; investments made by the institution; the global economy & inflation
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Political - institutional strategic agendas shifting in direction; changes in senior administration and therefore shifting loyalties and power
balances; a range of stakeholders in the academy with different/complementary interests; Assessment standards and measurement of impacts; unpredictable directions/pressures for post-secondary education; new governments with new agendas
Socio-cultural – new patron attitudes and preferences in their use of information and devices; new learning styles based on use of social media and other technologies; new purposes for using library spaces and collections, such as collaborative work shifting demographics that can lead to a new mix of the student population;
Mental paradigms affect risk assessment and decision-making in libraries. The historian of science Thomas Kuhn asserted that a paradigm is "the entire constellation of beliefs, values, techniques, and so on shared by the members of a given community.”
- In a library context, this constellation is typically conservative, reactive, and risk-averse (but changing…)
The importance of process: "The less things are predictable the more attention you have to pay to the strategy process. Uncertainty has the effect of moving the key to success from "the optimal strategy" to the "most skilful strategy process.” Kees van der Heijden, Scenarios: The Art of Strategic Conversation vii-viii.
“Prospect Theory: An Analysis of Decision under Risk” Econometrica 1979 47(2): 263-291.http://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf
The authors Daniel Kahneman and Amos Tversky, awarded the Nobel Prize for Economics in 2002
Originally applied to behavioral economics; then applied to other contexts
Has led to a more nuanced understanding of how we grapple with uncertainty and make decisions in the face of risk.
1 - Probability weighting;
2 - Reference dependence;
3 - Loss aversion;
4 - Diminishing sensitivity
The role of probability weighting in decision-making is quite crucial.
Typically, “the weighting function overweights low probabilities and underweights high probabilities.” Generally speaking, people are overconfident about expected outcomes related to risk, and make decisions with particular biases
Interview with Daniel Kahneman: ◦ “People systematically violate the predictions of expected utility
theory.”
◦ “The emotional tail wags the rational dog”
People derive utility from gains and losses, measured relative to some reference point, rather than from any absolute standard for economic well-being.
All gains and losses are therefore relative; no one size fits all
Think of your Collections budget, or Operations budget, or staff complement, as the reference point for your library’s experience in any given year – versus previous years.
Loss aversion - people are much more sensitive to losses—even small losses—than to gains of the same magnitude, eg“people tend to be risk averse over moderate probability gains: they typically prefer a certain gain of $500 to a 50 percent chance of winning $1,000.”
People hate losing much more than they love winning (by a factor of about 3 to 1, based on Kahneman and Tversky’sresearch)
Replacing a $100 gain (or loss) with a $200 gain (or loss) has a significant utility impact, replacing a $1,000 gain (or loss) with a $1,100 gain (or loss) has a smaller impact.
As numbers scale upward – think of budgets or collections-this implies that we become less sensitive to the impact that variations from expectations can produce
A serial that costs $100 this year and jumps to $500 next year is seen as a dramatic increase, versus a serial that costs $5,000 this year and $5,400 next year. Scale of perception is different.
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Kahneman and Tversky asked subjects to choose between the following two options:
A) a 5% chance to win a three-week trip to England, France and Italy; or
B) a 10% chance to win a one week trip to England.
67% of participants chose Option A, and 33% chose B, even though the odds are in favour of B.
In a second test, subjects were asked to choose between the following two options:
A) a 20% chance to win a gamble for $4,000; or
B) a 25% chance to win a gamble for $3,000
Result: 65% of participants chose Option A, and only 35% chose B, even though the odds are in favour of B.
Collection strategies, eg the possible end of the Big Deal
Funding challenges/existential threats
Consortial initiatives
The galloping horse of technology
Transformation of services
Contingencies such as natural disasters
Staffing shortfalls
Etc....
These principles can be useful in our mental toolkit for decision-making in a climate of difficult choices/opportunities
Prospect Theory can make us more aware of our default ways of understanding risk
Imperfect knowledge : dealing with risk
Speaks to the importance of evidence-based approaches, both for short and long term planning & decision-making
There’s too much evidence There’s not enough good evidence The evidence doesn’t quite apply People are trying to mislead you You are trying to mislead you The side-effects outweigh the cure Stories are more persuasive anyways
Pfeffer and Sutton, Hard Facts, Dangerous Half-truths, and Total Nonsense: Profiting from Evidence-based Management, Harvard Business School Press, Boston, MA.2006.
Risk is baked in to the academic world, and increasing in intensity with each year
The more aware we are of risk dynamics, the better equipped we are with dealing with tough constraints and choices.
Important to review the full spectrum of risk factors to better understand the landscape
Developing an evidence-based organizational culture is crucial
Prospect Theory can provide us with some insights on human decision-making under risk. Can this transfer to our world and be useful?
“Risk-taking in Academic Libraries: The Implications of Prospect Theory” Library Leadership & Management 28(2) 2014
https://journals.tdl.org/llm/index.php/llm/article/view/7055
